HMRC has launched a consultation on potential options for reform of the tax treatment of cryptoasset loans and ‘staking’ in the context of decentralised finance (De Fi).
DeFi lending and staking encompasses a range of activities that reward users who deposit cryptoasset tokens into a pool or lend them to other individuals or platforms for a certain period to earn passive income returns often described as interest.
The consultation notes that some activities are treated as disposals for tax purposes, even though effective ownership of the cryptoassets is retained, and suggests that the tax system ought to reflect the ‘economic substance’ of the activity in question.
The consultation proposes three potential options:
option 1: legislate to bring DeFi lending and staking within the repo and stock lending rules by defining cryptoassets as ‘securities’;
option 2: legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending; and
option 3: apply a ‘no loss no gain’ treatment to DeFi loans and staking, deferring the tax liability until the assets are economically disposed of.
The government will use the information received from this call for evidence to decide what changes, if any, are needed to reduce administrative burdens and costs for taxpayers engaged in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.
Zoe Wyatt, Andersen in the UK’s head of crypto & digital assets, said: ‘It is encouraging to see that HMRC is listening to both taxpayers and experts, and we are pleased to see it trying to identify compromises between stakeholders and government. The current market highlights the volatility of cryptoassets and the importance of this compromise; in some cases the tax alone can outweigh the economic value of the transaction or tokens at the point of extraction.’
‘Going forward, we advocate for the Treasury to examine the appropriate character of cryptoassets for tax purposes and consider its own separate regime within the tax legislation to move away from the shoehorn approach which HMRC has been faced with,’ Wyatt added.
The consultation closes on 31 August 2022.
In related news, HMRC has also released its report, Individuals holding cryptoassets: uptake and understanding, in consultation with Kantar Public, which details the UK population’s uptake and understanding of cryptoassets.
Joshua Boughton, senior associate at law firm Taylor Wessing, said: ‘The report confirms the growing popularity of cryptoassets: 10% of UK adults hold or have held a cryptoasset, and 68% of owners are “likely” or “very likely” to acquire more. It also confirms some generally accepted demographic characteristics: 76% of cryptoasset owners are under the age of 45, and 69% are male’. However, ‘only 42% of cryptoasset owners are aware that tax liabilities can arise when purchasing goods and services using cryptoassets.’
HMRC has launched a consultation on potential options for reform of the tax treatment of cryptoasset loans and ‘staking’ in the context of decentralised finance (De Fi).
DeFi lending and staking encompasses a range of activities that reward users who deposit cryptoasset tokens into a pool or lend them to other individuals or platforms for a certain period to earn passive income returns often described as interest.
The consultation notes that some activities are treated as disposals for tax purposes, even though effective ownership of the cryptoassets is retained, and suggests that the tax system ought to reflect the ‘economic substance’ of the activity in question.
The consultation proposes three potential options:
option 1: legislate to bring DeFi lending and staking within the repo and stock lending rules by defining cryptoassets as ‘securities’;
option 2: legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending; and
option 3: apply a ‘no loss no gain’ treatment to DeFi loans and staking, deferring the tax liability until the assets are economically disposed of.
The government will use the information received from this call for evidence to decide what changes, if any, are needed to reduce administrative burdens and costs for taxpayers engaged in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.
Zoe Wyatt, Andersen in the UK’s head of crypto & digital assets, said: ‘It is encouraging to see that HMRC is listening to both taxpayers and experts, and we are pleased to see it trying to identify compromises between stakeholders and government. The current market highlights the volatility of cryptoassets and the importance of this compromise; in some cases the tax alone can outweigh the economic value of the transaction or tokens at the point of extraction.’
‘Going forward, we advocate for the Treasury to examine the appropriate character of cryptoassets for tax purposes and consider its own separate regime within the tax legislation to move away from the shoehorn approach which HMRC has been faced with,’ Wyatt added.
The consultation closes on 31 August 2022.
In related news, HMRC has also released its report, Individuals holding cryptoassets: uptake and understanding, in consultation with Kantar Public, which details the UK population’s uptake and understanding of cryptoassets.
Joshua Boughton, senior associate at law firm Taylor Wessing, said: ‘The report confirms the growing popularity of cryptoassets: 10% of UK adults hold or have held a cryptoasset, and 68% of owners are “likely” or “very likely” to acquire more. It also confirms some generally accepted demographic characteristics: 76% of cryptoasset owners are under the age of 45, and 69% are male’. However, ‘only 42% of cryptoasset owners are aware that tax liabilities can arise when purchasing goods and services using cryptoassets.’
